GUIDE TO CISG ARTICLE 74

Secretariat Commentary (closest counterpart to an Official
Commentary)

Guide to the use of this commentary

The Secretariat Commentary is on the 1978 Draft of the
CISG, not the Official Text, which re-numbered most of
the articles of the 1978 Draft. The Secretariat
Commentary on article 70 of the 1978 Draft is quoted
below with the article references contained in this
commentary conformed to the numerical sequence of the
Official Text, e.g., article 70 [draft counterpart
of CISG article 74].

To the extent it is relevant to the Official Text, the
Secretariat Commentary on the 1978 Draft is perhaps the
most authoritative source one can cite. It is the
closest counterpart to an Official Commentary on the
CISG. A match-up of this article of the 1978 Draft
with the version adopted for the Official Text is
necessary to document the relevancy of the Secretariat
Commentary on this article. See the match-up for this article for a validation of citations to this
Secretariat Commentary. This match-up indicates that article 70 of the 1978
Draft and CISG article 74 are substantively identical.

Text of Secretariat Commentary on article 70 of the 1978 Draft[draft counterpart of CISG article 74] [General rule for measurement of damages]

1. Article 70 [draft counterpart of CISG article 74] introduces
the Section containing the rules on damages in case of a
claim under article 41(1)(b) or article 57(1)(b) [draft
counterpart of CISG article 45(1)(b) or article 61(b)] by
setting forth the basic rule for the calculation of those
damages. Article 71 and 72 [draft counterpart of CISG articles
75 and 76] implement article 70 [draft counterpart of
CISG article 74] by providing the means of calculating damages
in certain defined cases when the contract has been avoided.
Article 73 [draft counterpart of CISG article 77] provides
a rule on mitigation of damages while article 65 [draft
counterpart of CISG article 79] provides the rules on exemption
from liability because of an impediment to performance of the
obligation.

2. Article 70 [draft counterpart of CISG article 74] provides
the rule for the calculation of damages whenever and to
the extent that articles 71 and 72 [draft counterpart
of CISG articles 75 and 76] are not applicable. Therefore,
article 70 [draft counterpart of CISG article 74] applies
whenever the contract has not been declared avoided
by the party claiming damages, whether or not it could
have been. It also applies where the contract has been
avoided but there are damages in addition to those which
can be calculated under article 71 or 72 [draft
counterpart of CISG article 75 or 76].

Basic Damages

3. Article 70 [draft counterpart of CISG article 74] provides
that the injured party may recover as damages "a sum equal to
the loss, including loss of profit, suffered ... as a
consequence of the breach." This makes it clear that the
basic philosophy of the action for damages is to place
the injured party in the same economic position he would
have been in if the contract had been performed. The
specific reference to loss of profit is necessary because
in some legal systems the concept of "loss" standing alone
does not include loss of profit.

[Farnsworth states that "relief to the promisee is to be measured by his expectation, that is, by 'the benefit of the bargain,' and is not limited to the extent of his reliance losses. Although this is nowhere stated in so many words, it seems implicit in a reference to the promisee's 'loss, including loss of profit' in the first sentence of art 70 [draft counterpart of CISG art. 74]. The word 'loss' alone might be read narrowly to refer to out-of-pocket reliance expenditures, but the mention of 'loss of profit' makes it clear that is this not what is intended. ..." E. Allan Farnsworth, "Damages and Specific Relief," 27 Am. J.Comp. L. 249 (1979).]

[Enderlein & Maskow state: "As to the loss of profit, there are several possibilities. It may be questioned whether the injured party is entitled to recover the loss of profit he actually suffered, the exact profit he could have expected, or an average profit to be expected at a certain time in a certain place. It is unclear also for which period of time the loss of profit can be measured." Fritz Enderlein & Dietrich Maskow. "International Sales Law", Oceana (1992), p. 299. For presumptions as to the time and place at which the loss to the injured party should be measured, see footnote 2 to this Secretariat Commentary.]

4. Since article 70 [draft counterpart of CISG article 74] is
applicable to claims for damages by both the buyer and the
seller and these claims might arise out of a wide range of
situations, including claims for damages ancillary to a
request that the party in breach perform the contract
or to a declaration of avoidance of the contract, no
specific rules have been set forth in article 70 [draft
counterpart of CISG article 74] describing the
appropriate method of determining "the loss ...
suffered ... as a consequence of the breach". The
court or arbitral tribunal must calculate that loss
in the manner which is best suited to the circumstances.
The following paragraphs discuss two common situations
which might arise under article 70 [draft counterpart
of CISG article 74] and suggest means of calculating "the
loss ... suffered ... as a consequence of the breach".

5. Where the breach by the buyer occurs before the
seller has manufactured or procured the goods, article
70 [draft counterpart of CISG article 74] would
permit the seller to recover the profit which he
would have made on the contract plus any expenses
which he had incurred in the performance of the
contract. The profit lost because of the buyer's
breach includes any contribution to overhead which
would have resulted from the performance of the
contract.

Example 70A: The contract provided for the sale for
$50,000 FOB of 100 machine tools which were to be
manufactured by the seller. Buyer repudiated the
contract prior to the commencement of manufacture
of the tools. If the contract had been performed,
Seller would have had total costs of $45,000 of
which $40,000 would have represented costs incurred
only because of the existence of this contract (e.g.,
materials, energy, labour hired for the contract or
paid by the unit of production) and $5,000 would
have represented an allocation to this contract of
the overhead of the firm (cost of borrowed capital,
general administrative expense, depreciation of
plant and equipment). Because Buyer repudiated to
[the] contract, Seller did not expend the
$40,000 in costs which would have been incurred by
reason of the existence of this contract. However,
the $5,000 ofoverhead which were allocated to this
contract were for expenses of the business which
were not dependent on the existence of the contract.
Therefore, those expenses could not be reduced and,
unless the Seller has made other contracts which have
used his entire productive capacity during the period
of time in question, as a result of Buyer's breach
Seller has lost the allocation of $5,000 to overhead
which he would have received if the contract had been
performed. Thus, the loss for which Buyer is liable
in this example is $10,000.

Contract price $50,000 [less] expenses of performance
which could be saved $40,000 [equals] loss arising
out of breach $10,000.

Example 70B: If, prior to Buyer's repudiation of
the contract in Example 70A, Seller had already
incurred $15,000 in non-recoverable expenses in
part performance of the contract, the total damages
would equal $25,000.

Example 70C: If the product of the part performance
in Example 70B could be sold as salvage to a third
party for $5,000, Seller's loss would be reduced to
$20,000.

6. Where the seller delivers and the buyer retains
defective goods [see footnote 1], the loss
suffered by the buyer might be measured in a number
of different ways. If the buyer is able to cure
the defect, his loss would often equal the cost of
the repairs. If the goods delivered were machine
tools, the buyer's loss might also include the loss
resulting from lowered production during the period
the tools could not be used.

7. If the goods delivered had a recognized value which
fluctuated, the loss to the buyer would be equal to
the difference between the value of the goods as they
exist and the value the goods would have had if they
had been as stipulated in the contract [see footnote 2]. Since this formula is intended to restore
him to the economic position he would have been in
if the contract had been performed properly, the
contract price of the goods is not an element in the
calculation of the damages. To the amount as
calculated above there may be additional damages, such
as those arising out of additional expenses incurred as
a result of the breach [see footnote 3].

Example 70D: The contract provided for the sale of
100 tons of grain for a total price of $50,000 FOB.
When delivered the grain had more moisture in it than
allowable under the contract description and, as a
result of the moisture, therehad been some deterioration
in quality. The extra cost to Buyer of drying the
grain was $1,500. If the grain had been as contracted,
its value would have been $55,000, but because of the
deterioration caused by the moisture after it was
dried the grain was worth only $51,000.

Contract price $50,000

Value the grain would have had if as contracted $55,000
[less] value of grain as delivered $4,000 [less] extra
expenses of drying the grain $1,500 [equals] loss
arising out of breach $5,500.

Foreseeability

8. The principle of recovery of the full amount of
damages suffered by the party not in breach is subject
to an important limitation. The amount of damages that
can be recovered by the party not in breach "may not
exceed the loss which the party in breach foresaw or
ought to have foreseen at the time of the conclusion
of the contract, in the light of the facts and matters
which he then knew or ought to have known, as a possible
consequence of the breach of contract". Should a party at
the time of the conclusion of a contract consider that
breach of the contract by the other party would cause
him exceptionally heavy losses or losses of an unusual
nature, he may make this known to the other party with
the result that if such damages are actually suffered
they may be recovered. This principle of excluding the
recovery of damages for unforeseeable losses is found
in the majority of legal systems.

[At the Vienna Conference there was a proposal to have the foreseeability clause of article
74 read "Such damages may not exceed the reasonable expectation of loss which the party
in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in
the light of the facts and matters which he then knew or ought to have known, as a possible
consequence of the breach of contract." OFFICIAL RECORDS, p. 131). This proposal was
rejected with minimal debate. Id.at 394. An earlier attempt to preclude compensation for
"loss ... of an extent which would be excessive in relation to the price" was also rejected.
UNCITRAL Yearbook VIII, A/CN.9/SER.A/1977, p. 59, paras. 474-477].

[Lookofsky states "Although the Convention test seems quite liberal, requiring only that the
loss be foreseeable [*] by the defendant [**] at the time of contracting as a possible
consequence' of breach [***], full compensation for profits lost will sometimes be precluded
either by the mitigation requirement [art. 77] or by forum court standards of proof
applicable with respect to such loss [****]." Joseph Lookofsky, "The 1980 United Nations
Convention on Contracts for the International Sale of Goods", InternationalEncyclopaedia
of Laws,Blanpain, gen. ed. (Kluwer 1993), p. 124.]

* "As opposed to actually foreseen". ** "As opposed to the classical formulation in Hadley ... 'in the
"contemplation" of both parties'." *** "Compare (re American law) Farnsworth, E.A., Contracts (1990)
Section 12.14 with note 19 (foreseeable as probable). In the leading English case of the Heron II ... Lord
Hodson could not improve on the formulation in Victoria Laundry... `liable to result' (i.e. a 'serious
possibility' or 'real danger'." **** In American. law, only 'reasonable certainty' is now required. See
(e.g.) Farnsworth, E.A., Contracts, Section 12.15. In other legal systems, lost profits may be more difficult
to prove. Accord: Jan Hellner, `Consequential Loss and Exemption Clauses', Oxford Journal of Legal
Studies 13, 24 (1981)," Id.

9. In some legal systems the limitation of damages to
those "which the party in breach foresaw or ought to have
foreseen at the time of the conclusion of the contract"
is not applicable if the non-performance of the contract
was due to the fraud of the non-performing party.
However, no such rule exists in this Convention
(OFFICIAL RECORDS, p. 59).

FOOTNOTES

1. If the delivery of the defective goods constituted
a fundamental breach of contract, the buyer could avoid
the contract. In such a case he would measure his
damages under article 71 or 72 [draft counterpart
of CISG article 75 or 76] to the extent that those
articles were applicable.

2. Article 70 [draft counterpart of CISG article 74]
gives no indication of the time and place at which "
the loss" to the injured party should be measured.
Presumably it should be at the place the seller
delivered the goods and at an appropriate point of
time, such as the moment the goods were delivered,
the moment the buyer learned of the non-conformity
of the goods or the moment that it became clear that
the non-conformity would not be remedied by the seller
under article 35, 42, 43 or 44 [draft counterpart
of CISG article 37, 46, 47 or 48], as the case may be.

3. These additional elements of the buyer's damages
will often be limited by the requirement of
foreseeability discussed in para. 8 infra.